Take a Second to Read Draghi’s Minutes Is Lesson From Fed

By Simon Kennedy -
Jul 3, 2014

Mario Draghi just handed investors a
new way to make money.

Catching up with major international counterparts, the
European Central Bank president yesterday announced his
institution will start issuing minutes of policy meetings from
January as part of an overhaul that will reduce how often its
Governing Council sets interest rates.

Such publications give greater insight into the thinking of
monetary authorities and make them more predictable, according
to studies from central banks such as the U.S. Federal Reserve.
In the ECB’s case, accounts of proceedings might leave investors
less prone to being surprised by its actions while offering a
new trading opportunity on the days when they are released.

Minutes “enable central banks to better convey how they
are analyzing economies and so the markets are better
informed,” said Julian Callow, founder of London-based Catalyst
Economics Ltd.

This week’s pledge on minutes, which has been debated
internally since at least 2012, marks the latest embrace of
transparency by the euro area’s central bank as monetary
officials try to support weak economies and avoid spikes in
market borrowing costs by better guiding investors.

The ECB previously vowed to keep minutes out of the public
eye for 30 years for fear they would open officials to criticism
in their home countries, of which the euro-area currently has
18. Former chief economist Otmar Issing told centralbanking.com
last year that enough information was already provided and
detailed minutes would be “absurd” by risking “an endless
debate, which is very risky for the reputation and for the
European approach.”

More Nuance

“There is a lot of fear of the ECB being a special animal,
with doubts about the identification of governors and so on, but
I think that is overstated,” said Anatoli Annenkov, an
economist at Societe Generale SA in London. “It will provide
further nuance and detail on what kind of focus there was during
the meeting.”

Draghi said yesterday that the Governing Council will now
set monetary policy every six weeks rather than monthly, in part
to quell market speculation ahead of each gathering. That echoes
the timetable of the Fed, which has eight scheduled meetings a
year and publishes an account three weeks later.

“The issue is whether we should actually have, each and
every month, the expectation for action,” said Draghi, noting
the new agenda better enables the accounts of the meetings to be
prepared and approved. What the minutes will look like is still
being discussed.

‘Precious Insights’

Investors may nevertheless be buoyed by the decision given
the track record of minutes elsewhere.

They “could provide precious insights into the debates on
the Governing Council,” said Elga Bartsch, chief European
economist at Morgan Stanley in London.

The release of the Fed’s minutes last year had an average
effect of 2.1 basis points on the 10-year Treasury yield,
according to a March analysis by St. Louis-based Macroeconomic
Advisers LLC. A study published in September by Carlo Rosa of
the Fed Bank of New York found that volatility of two-year
Treasury yields is roughly three times larger on days when the
Fed posts such publications.

The appeal of minutes lies in providing more insight into
what policy makers are thinking about the economy and what
indicators they’re monitoring. A 2012 study of the Swedish
Riksbank’s minutes by economists Mikael Apel and Marianna Blix Grimaldi found they made it easier for investors to predict
future policy decisions in Sweden.

Transparency Score

The same stands for the Bank of England, whose economists
Rachel Reeves and Michael Sawicki wrote in 2005 that the U.K.
central bank’s minutes “have a marked impact on short-run
interest-rate expectations.” The BOE releases its account of
proceedings 13 days after its Monetary Policy Committee meets.

Failure to publish minutes has opened the ECB to criticism
for a lack of transparency. A Barclays Plc (BARC) survey of 844 clients
in April 2013 gave the central bank a score of 5.7 out of ten
for its communications, compared with 7.1 for the Fed. Fifty
nine percent of respondents considered minutes essential, up
from 34 percent in 2008.

Having led the way in transparency by holding monthly press
conferences since its inception, the ECB has slipped behind its
counterparts following the financial crisis as a desire to keep
investors informed led others to hold their own media briefings
and releasing more detailed economic forecasts.

The minutes announcement follows Draghi’s decision a year
ago to start committing to keep interest rates low for an
“extended period.” He repeated such so-called forward guidance
yesterday by saying the ECB borrowing costs “will remain at
present levels for an extended period of time.”